PTM113410 - International: the lifetime allowance charge and non-UK schemes: essential principles
| Glossary | PTM000001 |
When the lifetime allowance rules apply to members of non-UK schemes
Relieved non-UK pension schemes
Relieved members
Exemption from BCE 8 on a block transfer
Liability to the lifetime allowance charge
As of the 6 April 2023 there is no longer a lifetime allowance (LTA) charge. However, for the 2023-24 tax year the concept of lifetime allowance remains, and benefits crystallising still need to be measured against the lifetime allowance.
Relevant lump sums will no longer be subject to an LTA charge but instead there will be a charge to income tax at the individual’s marginal rate.
You can read more about the changes at PTM091100.
For any event that occurs before the 6 April 2023 the below guidance should still be followed and any LTA charges that arise will still apply.
When the lifetime allowance rules apply to members of non-UK schemes
Paragraphs 13 to 19 Schedule 34 Finance Act 2004
The lifetime allowance provision applies to Relieved members of Relieved non-UK pension schemes as if that scheme was a registered pension scheme.
Broadly, under the lifetime allowance provision every individual has a lifetime allowance which sets the total capital value of pension savings that they can draw as tax privileged benefits. The value of any benefits taken that exceed the individual’s lifetime allowance are subject to the lifetime allowance charge. Certain events trigger a test of the value of the member’s benefits against their lifetime allowance. These events are set by legislation and are called benefit crystallisation events (BCEs). Each BCE uses up part of the member’s lifetime allowance. Once the member has used up their lifetime allowance the value of benefits crystallised at the BCE will be liable to the lifetime allowance charge.
Full guidance on the lifetime allowance provisions and the lifetime allowance charge starts at PTM080000. The section starting at PTM088600 gives details for each benefit crystallisation event.
A relieved member can elect for their pension savings to be tested against the lifetime allowance before an actual BCE occurs - see PTM113430.
There is an overall limit on the total amount of the benefits under a relieved non-UK pension scheme that may be tested against an individual’s lifetime allowance. This limit, namely the relevant relieved amount, ensures that only amounts in the relieved non-UK pension scheme that have received UK tax relief after 5 April 2006 are tested against the lifetime allowance. PTM113420 provides guidance on the relevant relieved amount.
As the lifetime allowance provisions apply to a relieved non-UK scheme as if it was a registered pension scheme it means that an individual will lose enhanced protection if they:
- become a relieved member of a relieved non-UK pension scheme after 5 April 2006 unless the individual is becoming a member of the scheme as a consequence of a permitted transfer made to the scheme, or
- make a relevant contribution to an other money purchase arrangement under a relieved non-UK scheme.
An individual will be able to continue to accrue benefits in a defined benefits arrangement, or a cash balance arrangement under a relieved non-UK pension scheme that they were a member of before 6 April 2006. However, in almost all cases the individual will lose enhanced protection if a benefit is taken in respect of the individual (see PTM092400).
Relieved non-UK pension schemes
Paragraphs 13(3) Schedule 34 and 51(3) Schedule 36 Finance Act 2004
Article 15 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572
A pension scheme is a relieved non-UK pension scheme if it is not a registered pension scheme and if one or more of the following conditions are met:
- migrant member relief (see PTM111200) has been given in respect of contributions paid to the scheme
- transitional corresponding relief (see PTM111500) has been given in respect of contributions paid to the scheme
- contributions made to the scheme after 5 April 2006 have received tax relief under a double taxation agreement - see PTM111600, or
- any member of the scheme has been exempt from liability to tax by virtue of section 307 Income Tax (Earnings and Pensions) Act 2003 (ITEPA) in respect of provision for retirement or death benefits made by the employer after 5 April 2006 when the scheme was an overseas pension scheme (see PTM112200).
Section 307 ITEPA exempts members from tax on their accrual of benefits in the scheme as a benefit in kind. So, the lifetime allowance provision will apply even where no contributions have been made to the scheme, for example because of a contributions holiday or because the scheme is unfunded.
Relieved members
Paragraph 13(4) Schedule 34 Finance Act 2004
An individual is a relieved member of a relieved non-UK pension scheme if at any time after 5 April 2006:
- contributions paid by or in respect of the member to the scheme have received migrant member relief (see PTM111200), transitional corresponding relief (see PTM111500) or relief under a double taxation agreement - see PTM111600, or
- they have been exempt from liability to tax by virtue of section 307 ITEPA.
Exemption from BCE 8 on a block transfer
Paragraphs 16 and 18 Schedule 34 Finance Act 2004
A recognised transfer to a qualifying recognised overseas pension scheme (QROPS) is usually a BCE 8 (see PTM088690). Paragraph 16 of Schedule 34 provides that if the transfer is a block transfer there is no BCE 8.
A block transfer is a transfer in a single transaction of all of the individual’s sums and assets in the relieved non-UK pension scheme relating to the individual and at least one other member of the scheme. A single transaction means that all of the transferred sums and assets must be transferred to one scheme. This provision ensures that individuals who are forced to transfer to a new scheme because of a company takeover or re-organisation are not caught by a benefit crystallisation event.
Following the block transfer the lifetime allowance provisions will continue to apply as appropriate to the receiving scheme and the member. After the transfer:
- the receiving scheme is treated as a relieved non-UK pension scheme (even where that scheme does not meet the definition set out above),
- the member is treated as a relieved member (even where that individual no longer meets the definition set out above), and
- the amount transferred is treated as the member’s relevant relieved amount (see PTM113420), or as part of their relevant relieved amount, in the receiving scheme. This means that the transferred amount is added to any pension input amounts relating to the individual in the receiving scheme and will be tested against the individual’s lifetime allowance at any subsequent benefit crystallisation events under that scheme.
Liability to the lifetime allowance charge
Paragraph 17 Schedule 34 Finance Act 2004
Unlike registered pension schemes a relieved member of a relieved non-UK pension scheme is solely liable to the lifetime allowance charge. That member is liable to the lifetime allowance charge whether or not they or the scheme manager are resident or domiciled in the UK.
Individuals who are liable to a lifetime allowance charge will need to declare that on their Self Assessment tax return for the tax year in which the benefit crystallisation event occurred. If a member has not been served with a notice to file a tax return they are bound by the normal obligation to tell HMRC about their chargeability to UK tax.
The lifetime allowance charge will not be within the scope of, and will not be exempted or overridden by, any of the UK’s double taxation agreements. That is because it is not a charge on income and so does not come within any of the articles in the treaties.
There are no specific rules dealing with benefits expressed in a foreign currency, but it would be acceptable for the lifetime allowance charge payable to be calculated by converting the benefits payment into sterling using the spot rate for the date of the benefit crystallisation event.